Tax reform. Interest-rate hikes. Regulatory questions. Inflation. There’s always a reason to put off making changes to your company’s defined contribution (DC) plan. But some improvements will be good for your plan and participants no matter what happens.
Defining Your Company’s Future
It’s gotten much tougher over the past few years to hire and retain top talent, due to a tight labor market and unemployment at its lowest since 2001. Offering a defined contribution (DC) plan is pretty much “cost of entry”—and so is a well-rounded approach to retirement readiness. Despite the explosion of experimental work/life perks offered by companies today, an appealing DC plan is still one of the top incentives for most workers.
With all the discussions and debate going on in Washington, DC, plan sponsors might think they should wait before making any changes to their plans. But our recent survey of plan sponsors reveals several ways to improve DC plans right now—regardless of what happens inside the Beltway.
Here are six tips to help DC plan sponsors enhance their firms’ retirement-readiness offerings.
1. Offer a Good Default Option
With each passing year, more DC plans are using target-date funds as their qualified default investment alternative (QDIA). Today, a wide array of target-date funds may be more appropriate than the first generation of prepackaged, proprietary mutual-fund vehicles that typically came with a provider’s recordkeeping services. Target-date funds now offer such benefits as open architecture, cost-saving collective investment trusts, customized glide paths and in-plan guaranteed-lifetime-income solutions.
2. Make the Plan Automatic
Setting up automatic enrollment and automatic escalation helps workers save for retirement, and can also boost a DC plan’s success metrics. Higher participation rates are part of that success, as is higher overall plan savings.
3. Give Employees a Financial Wellness Program
Companies offer these formalized, needs-driven programs to employees as added resources, separate from a 401(k) education program. The most common services are investment planning, targeted education programs and seminars. Company leaders cite several important benefits of these programs: employees are more engaged, have a better perception of the organization, are more productive and focused, and feel less stress.
4. Update the Investment Menu
Yes, automatic enrollment has increased the use of a DC plan’s default investment. But there will always be some participants who want to choose their own options from the plan’s core menu. Taking a fresh look at their investment options may help DC plan sponsors offer a better selection for their plan and participants.
5. Raise Plan Sponsors’ Fiduciary Awareness
Unfortunately, plan sponsors’ fiduciary awareness has been declining for at least the past several years. The current questions surrounding the Department of Labor’s fiduciary rule shouldn’t lull plan sponsors into complacency—they’ve been qualified as fiduciaries ever since the 1974 ERISA rules were put in place. Fiduciary status carries legal ramifications—for individuals. So every company should look to either add fiduciary training if they don’t have it or improve it if they do.
6. Call in the Cavalry
If you’re not sure which steps would be right for your company’s DC plan to take, consider enlisting the help of a financial advisor or consultant. This is especially important for plans with less than $50 million in assets. Smaller-size plans that employ a financial advisor fare much better than those that don’t, showing higher participation rates, higher average savings among participants, and more participants improving their retirement readiness.
It’s Time for a Change
“Well begun is half done.” While Mary Poppins may have made that line famous, Aristotle mentioned it as an oft-cited proverb over 2,000 years ago. DC plans are a core element in hiring and retaining the best employees—something every company wants to do today, not tomorrow. That’s reason enough to push for DC plan progress now.
"Target date" in a fund's name refers to the approximate year when a plan participant expects to retire and begin withdrawing from his or her account. Target-date funds gradually adjust their asset allocation, lowering risk as a participant nears retirement. Investments in target-date funds are not guaranteed against loss of principal at any time, and account values can be more or less than the original amount invested—including at the time of the fund's target date. Also, investing in target-date funds does not guarantee sufficient income in retirement.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.